Facing FSCS: how are you budgeting in 2013?

Budgeting for regulatory spend is perhaps one of the most profound questions facing wealth management executives moving into 2013.

With firms such as Brooks Macdonald and Courtiers estimating they have spent between 10-20% of revenues on regulation in 2012 alone, a raft of senior figures in the industry are warning that we can expect more of the same in 2013.

This is supported by the Financial Services Authority (FSA) estimating that retail distribution review (RDR) compliance will cost firms 75 basis points of revenue per year on an ongoing basis, on top of the Financial Services Compensation Scheme (FSCS) levy, unexpected interim levies, and the ongoing suitability review.

Chris Macdonald, chief executive of Brooks Macdonald, is budgeting for hard regulatory costs over its financial year, which runs from June to June in the region of 5-6% of turnover.

‘However, it should be stressed these are the hard costs and thus likely to be very understated, as management time, for example, would not be accounted for in these figures,’ he added.

FSCS 'notoriously difficult' to budget for

Speaking ahead of the FSA's publication of further proposals to reform FSCS funding, he broke down the costs, citing staff costs relating to compliance, risk and supervisory units as the largest expected outgoing, alongside costs relating to the RDR and ‘repapering’ exercises around suitability. With the FSCS levy totalling £265 million in 2012-2013 alone, Macdonald acknowledges this has proved ‘notoriously difficult to budget for’, so the firm is maintaining its figure at last years, which was £250,000, inclusive of interim levies.

The issue is perhaps confounded by a number of question marks over previous levies, particularly following the FSCS’s decision to pay back £71 million to fund management and investment intermediary firms which resubmitted their tariff data for 2010/11 – the year of the massive £336 million interim levy. This has created a shortfall in funding for compensation claims for this year, with firms facing an additional £36 million redistribution levy to cover the gap. Investment intermediaries also face an additional £25 million shortfall for 2012/13.

Administration charges doubled

Rising regulatory costs have caused Killik & Co to double its administrative charge for contract notes from £5 to £10 in order to recoup some of the cost. Having spent between £500,000 and £600,000 on FSCS levies over the fiscal year up to March 2012, Killik is budgeting for a similar expenditure on FSCS for 2013 as well. Founder Paul Killik notes that over the past two to three years the FSCS levy has averaged around 2% of revenues.

‘If, for some reason, the levy disappears we will scale back the compliance cost,’ Killik added.

Based on previous years, Killik expects to spend around 4% of revenues on direct compliance costs, but with management time factored in he anticipates that figure could be as high as 8-10%, which could equate to between £1.2 million and £1.4 million.

While Killik believes strong compliance and processes are positive for wealth management businesses and indicative of good business practice, he takes issue with what he describes as the FSA’s ‘box ticking approach’ and estimates that 50% of his time is currently spent on compliance-related matters.

Advisory firm Alan Steel, meanwhile, is expecting to spend between 5% and 10% of turnover on regulation in 2013. Revenues in 2012 were just over £4 million.

‘Our subscription to the FSA has quadrupled over four years, never mind how much we have to spend on professional indemnity insurance because the regulator has left the industry in a complete mess,’ he said.

The company paid out £83,000 towards its total FSA subscription between April 2012 to March of this year. Within that, around £70,000 related to the FSCS, and it had to make an extra payment of £65,000 on top of that because of the firm’s Keydata exposure.

Looking ahead, finance director Frances Steel said she is budgeting for the FSCS levy but not another interim levy.

Meanwhile, wealth advisory firm jonathanfry plc estimates that around 10-15% of revenues could be attributable to compliance costs.

Risk and compliance officer Marc Granville estimates that suitability will account for the biggest portion of the regulatory budget, followed by RDR and ‘regulatory change’, or rather, responding to change and developments that are coming out of the regulator.

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